Exclusivity Agreements, the Bailout Act, and Section 126(c)

Elizabeth Nowicki —  5 October 2008

The Wachovia-Citigroup-Wells Fargo dance continues.  Now, however, it seems to involve confusion about Section 126(c) of the newly adopted Emergency Economic Stabilization Act (“EESA”).  Allow me to take a stab at clarifying.

To bring everyone up to speed, last weekend, after Lehman was allowed to go belly-up and Washington Mutual was seized by the FDIC, the FDIC came knocking on Wachovia’s door. To stave off being seized, Wachovia’s looked for a buyer. As of last Sunday evening, Wells Fargo and Citigroup were the two most likely buyers/saviors for Wachovia, but Wells Fargo bowed out at the last minute. According to the CEO of Wachovia, Robert Steel, Wachovia’s two options then became (a) file for bankruptcy or (b) agree to sell its banking assets to Citigroup in a deal in which the FDIC agreed to backstop Citigroup’s losses on Wachovia’s bad debts. Wachovia’s board agreed to the latter option, and, on Monday, the “agreement-in-principle” with Citigroup was announced.

Four days later, on Friday morning, Wachovia announced its board was abandoning the Citigroup deal in favor of a complete acquisition by Wells Fargo. Citigroup responded with outrage, particularly given that Wachovia had signed a binding Exclusivity Agreement with Citigroup which precluded Wachovia from talking to other suitors until October 6th. Over the weekend, on Saturday night, Citigroup secured an order from New York State Justice Ramos extending the Exclusivity Agreement through this coming Friday. Apparently this order was reversed on appeal this evening because it was signed at Ramos’s Connecticut home. (Why does a New York State Justice live in Connecticut? I digress.)   In the meanwhile, Wachovia filed in New York federal district court for an injunction striking down the Exclusivity Agreement. As I understand it, Federal District Judge Koeltl, after a hearing today, set a hearing for Tuesday, to resolve the issue of whether Section 126(c) of the newly adopted Emergency Economic Stabilization Act voids the entire Exclusivity Agreement.

Wachovia is arguing that EESA Section 126(c) voids the Exclusivity Agreement such that Wachovia is free to negotiate with anyone and pursue the Wells Fargo deal. But a simple reading of 126(c) confounds that argument.  This newly adopted statutory provision amends Section 13 of the Federal Deposit Insurance Act by adding at the end the following new paragraph:

(11) UNENFORCEABILITYOFCERTAINAGREEMENTS.—No provision contained in any existing or future standstill, confidentiality, or other agreement that, directly or indirectly—

(A) affects, restricts, or limits the ability of any person to offer to acquire or acquire,

(B) prohibits any person from offering to acquire or acquiring, or

(C) prohibits any person from using any previously disclosed information in connection with any such offer to acquire or acquisition of,

all or part of any insured depository institution, including any liabilities, assets, or interest therein, in connection with any transaction in which the [FDIC] exercises its authority under section 11 or 13, shall be enforceable against or impose any liability on such person, as such enforcement or liability shall be contrary to public policy.

This new provision only says that DEAL JUMPERS – third parties –cannot face liability for violating an exclusivity or standstill agreement in another buyer’s acquisition agreement with a target.  This provision, in effect, precludes a buyer from bringing a tortious interference claim against a deal jumper.  This new provision does not say such exclusivity agreements will automatically be completely null and void. Quite the opposite. The amendment only says that no exclusivity agreement can “be enforceable against or impose any liability” on any person offering to acquire a target otherwise bound by the exclusivity agreement.

The title of this new provision – “UNENFORCEABILITY OF CERTAIN AGREEMENTS” – is misleading, because the text of the provision does not make certain agreements unenforceable. Rather, it makes certain agreements unenforceable against DEAL JUMPERS. Got it?

3 responses to Exclusivity Agreements, the Bailout Act, and Section 126(c)


    This bailout is just one more example of the indivisible handjob stroking irresponsible CEOs and CFOs with billions so that they can run the American economy even further into the ground. So much for Keynesian economics. If the goal is to stimulate the economy, why not give the money directly to the American taxpayers? We could do twice as much good for the economy by giving half as much money directly to hardworking American taxpayers. A bird in the hand is worth two in the bush administration.


    Who is “any such person” in the last para?

    1) Why can’t it include “any insured depository institution” — they are mostly legal persons, no?
    2) If they successfuly acquire “all or part” of the institution, then the deal will not be enforcable anyway since the persons in a-c will be the persons to sue.
    3) “as such enforcement or liability shall be contrary to public policy” — enforcement against the third party is contrary to public policy then enforcement against the “depository institution” is surely also contrary to public policy, which is grounds for the court to decline to enforce it even if it is not specifically vacated.

    I think this will get a broad reading, and there will be no order to perform the exclusivity agreement.

    Not a Law Blogger 5 October 2008 at 10:07 pm

    Would Wachovia have gone into bankruptcy or FDIC receivership?

    This amendment certainly preempts by virtue of the Supremacy Clause of the U.S. Constitution Citi’s tortious interference and other claims against Wells Fargo as a matter of law (no disputed facts to be found or trial needed).

    The exclusivity agreement by its own terms terminates on Monday, October 6th, thus denying Citi of any injunctive relief against Wachovia accepting Wells’ offer on October 7th.

    Citi’s claim for damages – now limited to Wachovia – would appear to have to focus on the poison pill provisions (such as issuance of preferred to Wells equal to 40% of the vote) as those preclude Citi from effectively negotiating and counteroffering.

    Absent those poison pill provisions, Citi is not damaged by Wachovia accepting Wells’ offer two business days earlier than appears to be permitted by the exclusivity agreement b/c the ultimate test is what Wachovia’s shareholders want.

    Fascinating stuff!